22 Chapter 1 An Overview of Financial Management and the Financial Environment

commercial banks (Citibank), a huge insurance company (Travelers), and a major investment bank (Smith Barney), along with numerous other subsidiaries that operate throughout the world. Citigroups structure is similar to that of major institutions in Europe, Japan, and elsewhere around the globe. Among the worlds largest world banking companies, only one (Citigroup) is based in the United States. While U.S. banks have grown dramatically as a result of recent mergers, they are still relatively small by global standards.

1.7 Types of Financial Markets

Financial markets bring together people and organizations needing money with those having surplus funds. There are many different financial markets in a developed economy. Each market deals with a somewhat different type of instrument, customer, or geographic location. Here are some of the major types of markets: 1. Physical asset markets (also called tangible or real asset markets) are those for such products as wheat, autos, real estate, computers, and machinery. Financial asset markets, on the other hand, deal with stocks, bonds, notes, mortgages, and other financial instruments. 2. Spot markets and futures markets are markets where assets are being bought or sold for on-the-spot delivery (literally, within a few days) or for delivery at some future date, such as 6 months or a year into the future. 3. Money markets are the markets for short-term, highly liquid debt securities. Capital markets are the markets for intermediate- or long-term debt and corporate stocks. The New York Stock Exchange is an example of a capital market. When describing debt markets, short term generally means less than 1 year, intermediate term means 1 to 5 years, and long term means more than 5 years. 4. Mortgage markets deal with loans on residential, agricultural, commercial, and industrial real estate, while consumer credit markets involve loans for autos, appliances, education, vacations, and so on. 5. World, national, regional, and local markets also exist. Thus, depending on an organizations size and scope of operations, it may be able to borrow all around the world, or it may be confined to a strictly local, even neighborhood, market. 6. Primary markets are the markets in which corporations raise new capital. If Microsoft were to sell a new issue of common stock to raise capital, this would be a primary market transaction. The corporation selling the newly created stock receives the proceeds from the sale in a primary market transaction. The initial public offering (IPO) market is a subset of the primary market. Here firms go public by offering shares to the public for the first time. Microsoft had its IPO in 1986. Previously, Bill Gates and other insiders owned all the shares. In many IPOs, the insiders sell some of their shares plus the company sells newly created shares to raise additional capital. Secondary markets are markets in which existing, already outstanding securities are traded among
What is the difference between a pure commercial bank and a pure investment bank? List the major types of financial institutions and briefly describe the primary function of each. What are some important differences between mutual and hedge funds? How are they similar?

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